bus law exam 2
dissolution of a partnership
the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business
trade name - doing business as
Putting your name in the company's name; creating a "business name"
special needs trust
trusts made specifically for the benefit of disabled or mentally ill beneficiaries; done because these beneficiaries lack the mental capacity to manage their own finances
general partner, personal liability of
Manage/operate the company; retain unlimited personal liability
rights to participation in management, indemnification, and information
Management - A situation in which, unless otherwise agreed, each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters Indemnification - Right of a partner to be reimbursed for expenditures incurred on behalf of the partnership; Stand in the shoes of; First place for liability falls to business, and then if business cannot indemnify individual partners, the partners will owe debts and obligations Information - Every partner has right to full reconciliation of books, emails, contracts, etc.
uniform partnership act
Model law which is adopted across many states which sets the framework for how partnerships operate; Majority interest of remaining partners can agree to continue partnership within 90 days upon dissolution; Contain list of responsibilities: fiduciary duties; See "Rights" below
operation of a partnership
Must have true business purpose; Fiduciary duty
admissions of new limited partner and dilution of shares
New limited partner can be added only on written consent of all partners
tax treatments for each type of business form (partnership)
One point of taxation only for income = personal return (flow-through taxation); GP not taxed on revenues; LP has single point of taxation at federal level
general powers of directors and officers
Outside board service; External sales and informal marketing; Mergers and acquisitions; Fiduciary management of pension and 401k programs
tax treatments for each type of business form (sole)
Owner is the business and the owner reports business income on his/her personal income tax return; Not taxed on revenues; Owner is legally responsible for all debts and obligations incurred by the business; Low legal, tax and administration expenses; Personal income tax return = business return
functions of shareholder
Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation; Vote on directors and other major actions taken by the corporation
joint and several liability of limited liability partners in PA
Partners are not personally liable unless one is negligent or commits misconduct; Obligations are solely the obligation of the partnership as a whole
limited partnerships
Partnership that has 2 categories of partners -> At least one general partner, and at least one limited partner Limited partner contributes money (investor) General partner runs business; Has management control
tax treatments for each type of business form (corporations)
Pay income taxes on profits when they are earned
b corporations
Permit/Recommend board of directors and officers to make decisions which are socially conscious and abide by broad-based fiduciary duties to society (Example: Ben and Jerry's); Do not necessarily aim to make highest profit
closely held corporation/privately held corporation
Private for-profit corporation whose shares are usually owned by a few shareholders, who are often family members, relatives, or friends; its stock is publicly traded on occasion but not on a regular basis
related party transactions
a transaction that takes place between two parties who hold a pre-existing connection prior to the transaction. An example is how a dominant shareholder may benefit from making one of their companies trade to the other at advantageous prices.
rule against perpetuity
a trust cannot exist in perpetuity forevermore; Wanted to break up large pieces of wealth in 1800s; No more than 100 years; Many states have abolished this rule Exceptions: Charitable trust can last forever (trust that funds Carnegie Library)
total return trust
if income beneficiaries are not getting a "reasonable rate of return" then we will permit a trustee of an irrevocable trust to distribute more than just the income; state law; some income, some principal - total return; give them 5% instead of 2%; artificial way of helping economy along
termination of a partnership
Ceases to exist in functionality and partners get money back
subsidiary
The corporation that is owned by the parent corporation in a share exchange
inside director
A person on the board of directors who is also an officer of the corporation
case holding in the southern peru copper case
"See if this transaction made sense" = Wrong; Set up special board committee incorrectly; Director/officer had personal stake in oil
capital contributions and requirements in a partnership
(GP): All partners have equal right to participate in management regardless of capital contribution
bylaws
A detailed set of rules adopted by the board of directors after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation
piercing the corporate veil
A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation's debts and obligations
duty to inform
A duty a partner owes to inform is or her co-partners of all information he or she possesses that is relevant to the affairs of the partnership
duty of loyalty
A duty that a partner owes not to act adversely to the interests of the partnership; Self-dealing (dealing personally with GP), usurping of a partnership opportunity (if offered business opportunity, must offer to partnership), etc.
duty of obedience
A duty that requires partners to adhere to the provisions of the partnership agreement and the decisions of the partnership
bonds
A long-term debt security that is secured by some form of collateral (real estate, personal property, etc.); Bonds are the same as debentures except that they are secured
s corporations
Corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes; An S corporation pays no FIT at the corporate level; The S corporation's income or loss flows to the shareholders and must be reported on the shareholders' individual income tax returns
preferred stock
A type of equity security that is given certain preferences and rights over common stock; Can be issued in classes or series
common stock
A type of equity security that represents the residual value of a corporation; Has no preferences; Does not have fixed maturity date
artificial person
Corporations are treated, in effect, as artificial persons created by the state that can sue or be sued in their own names, enter into and enforce contracts, hold title to and transfer property, and be found civilly and criminally liable for violations of law
ability of an agent to make gifts to himself from the principal under a power of attorney
Agent has fiduciary duty to principal to handle with integrity; PA allows principal to allow agent to make gifts for himself
right of first refusal
Agreement that requires a selling shareholder to offer his or her shares for sale to the other parties to the agreement before selling them to anyone else; Partnership itself can buy back share of partner that leaves; Then goes to individual partners
buy sell agreement
Agreement that requires selling shareholders to sell their shares to the other shareholders or to the corporation at the price specified in the agreement; Specifies who can purchase shares of a partnership when someone is exiting that business
liquidity of stocks and bond of C corporations which are publicly traded
All good on way in but when want to sell shares, how do you get out of it; Unicorns less liquid than C corporation publicly traded stocks and bonds
unlimited personal liability
Any lawsuit against sole proprietorship or its employees can lead to unlimited personal liability; Creditors can go after owner's personal assets to satisfy business debts
fiduciary duty of directors, officers, and majority shareholders (duty of care)
Codified under Delaware state law because it is very friendly to directors and officers; Provides a lot of statutory protection against personal liability; Duties of obedience, care and loyalty owed by directors and officers to their corporation and its shareholders
limited partner
Contributes the money for the business (investor); No day-to-day authority in business and has no say in how money is spent; Only liable to extent of capital they invested
typical corporate powers - ownership of property
Corporation has the power to purchase, own, lease, sell, mortgage, or otherwise deal in real and personal property; make contracts; lend money; borrow money; incur liabilities; issue notes and bonds and other obligations; invest and reinvest funds; sue and be sued in its corporate name; make donations for the public welfare or for charitable, scientific, or educational purposes
business judgment rule
Courts will not interfere with business decisions if there is no conflict of interest, decision makers were informed and considered alternatives, make decisions in good faith, in furtherance of a rational corporate purposes; Helps to indemnify/protect business leaders from breach of duty of care lawsuits; Statutory law in DE; Rule will apply in US if the director/officer: • Took reasonable steps to become informed about the matter • Had a rational basis for his/her decision • Did not have a material conflict of interest between his/her personal interest and that of the corporation
charitable trust
Created for the benefit of a segment of society or society in general
advantages of delaware corporate laws
DE corporation code provides for corporations incorporated in DE to adopt so-called poison pills, which make it difficult for another company to take over a DE corporation unless the board of directors of the target corporation agrees and removes such poison pills; Chancery court system, which hears and decides business cases and decides favorably for large corporations and there are no emotional juries because they are experts at deciding law disputes
functions of director
Decides overarching mission and mission statement of a company; Policymaking decisions; Selects and removes corporate officers; Determines capital structure of corporation; Declares dividends
distribution of and rights to profits in a partnership (duty to inform and duty of obedience)
Decisions are made in best interest of partnership, not individuals
spendthrift provisions of a trust
Designed to prevent a beneficiary's personal creditors from reaching his or her trust interest; No third party creditor can get these assets from the grantor/trustee
limited liability partnerships
Differs from limited partnership in that a general partner has same liability as limited partner; LLPs may still manage and control affairs of own LLPs; Pass-through taxation
outside director
Director who does not hold a management position within the corporation; Director also has no conflict of interest and is truly independent
durable power of attorney
Exists during someone's capacity and incapacity; Exists and survives when someone becomes too ill to care for themselves; Exists until death
prudent investor rule
Fiduciary/trustee shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms and other circumstances of the trust, and by pursuing an overall investment strategy reasonably suited to the trust
public corporation/publicly traded corporation
For-profit corporations that have many shareholders; Often, they are large corporations with hundreds or thousands of shareholders, and their shares are usually traded on organized securities markets.
distribution of and rights to profits in a partnership (duty of loyalty and duty of care)
General partner has right to an equal share in partnership's profits and losses; In GP, more than one individual has rights to profits
pass through taxation of a partnership
General partnerships do not pay federal income taxes. Instead, the income and losses of a partnership flow onto and have to be reported on the individual partners' personal income tax returns
conflict of interest
Generally not permitted to exist between a corporation and its officer/director; Also applies to LLC, LLP, etc.; Exists when a leader of a company has some type of personal interest that may be against the interest of the corporation he is serving; As long as person does not surrender integrity -> not conflict of interest
functions of officer
Have day-to-day management control over authority; Enact mission statement/strategic plan created by director; Make significant decisions for company; Manage profit and loss; Derive revenue; Make day-to-day hiring and firing decisions; Who customers and employees believe to be responsible for well being of an entity
limited liability companies
Hybrid form that combines the limited liability aspects of the corporation and the tax advantages of a partnership; Accident/Negligence is excused in terms of personal liability; Controlled by operating agreement
duties of a trustee
Identifying assets, paying creditors, paying income and estate taxes, transferring assets to named beneficiaries, and rendering an accounting; Attorney, accountant, bank; Act with honesty, good faith and prudence in administering the trust and must exercise a high degree of loyalty towards all trust beneficiaries; Can charge fee
personal guarantor
If a limited partner personally guarantees a loan made by a creditor to the limited partnership and the limited partnership defaults on the loan, the creditor may enforce the personal guarantee and recover payment from the limited partner who personally guaranteed the repayment of the loan
joint and several liabilities of partners
If one partner is only one who has money or is not detained, that partner is responsible for everyone else's share
requirements for formation of a partnership
It must be... 1. An association of two or more persons 2. Carrying on a business 3. As co-owners 4. For profit
manager managed llc
LLC that has designated in its articles of organization that it is a manger-managed LLC. Non-manager members give their management rights over to designated managers. Managers have authority to bind the LLC to contracts; Managers owe duty of loyalty and care to LLC; Manager can own LLC and take salary without doing anything
member managed llc
LLC that has not designated that it is a manger-managed LLC in its articles of organization and is managed by its members; Each member has equal rights in management of business of LLC, regardless of capital contribution; All members have agency authority to bind the LLC to contracts. A member of a member-managed LLC owes a duty of loyalty and care to the LLC
corporation
Large entities which anticipate extensive subsidiary arrangements; Directors, officers and shareholders all have implicit limited liability; Double taxation both at the shareholder level and corporate level, meaning C corporation pays taxes at corporate level and shareholders pay taxes on dividends paid by corporation; Corporation is liable for the torts and crimes of employees and provides indemnification
limited partnership shares - lack of liquidity
Limited partners in a limited partnership have an illiquid investment because there is no readily available market for buying and selling limited partnership interests
offshore corporation
Refers to a corporation, LLC or similar class of entity formed in a foreign country to that of the principals of the organization or one that can only operate outside of its country of formation
authority to conduct ordinary business activities as a partner
Responsibility of general partner in LP; In GP, right to participate in management, indemnification, information
proxy
Shareholder's authorizing of another person to vote the shareholder's shares at the stakeholders' meetings in the event of the shareholder's absence; Shareholders vote by proxy, or appoint another person as their agent to vote at a shareholders' meeting; Proxy may be directed exactly how to vote the shares or may be authorized to vote at own discretion; May be in writing or posted online; Written document itself is called the proxy and is valid for 11 months
sole proprietorship
Simplest form of business; Legally responsible for all debts and obligations incurred by the business; Unlimited personal liability major flaw
liability treatments for each type of business form
Sole Proprietorship - Sole proprietor bears the risk of loss of the business; Owner bears all liability Partnership - Personal liability is unlimited for every general partner; Partners of general partnership have personal liability for the contracts and torts of the partnership; New partner admitted to general partnership is liable for the existing debts and obligations only to extent of his or her capital contribution Corporations - Legal entity separate from shareholders/owners
case holding from the us steel case
Stands for proposition that directors and officers who are exercising their fiduciary duty of care have to make decisions about property controlled and owned by the corporation; It is in fact within the purview of directors/officers to make decisions about property; Must make decision in best interest of corporation (most profitable)
unicorns
Start-up ventures that are getting bigger and generally not publicly traded companies; Held by institutional and wealthy investors like venture capital firms; Can get extremely big because of the wealthy investors; Privately held; If unicorn doesn't do well, who do shareholders sell stock to?
articles of incorporation
The basic governing documents of a corporation. It must be filed with the secretary of state of the state of incorporation; Articles of incorporation must include: • Name of corporation • Number of shares the corporation is authorized to issue • Address of corporation's initial registered office and the name of the initial registered agent • The name and address of each incorporator
entire fairness standard
The business judgment rule is a default rule where the plaintiff has the burden of proof. The "entire fairness standard" is triggered where a majority of the directors approving the transaction are interested or where a majority stockholder stands on both sides of the transaction.
parent
The corporation that owns the shares of the subsidiary corporation in a share exchange
duty of care
The obligation partners owe to use the same level of care and skill that a reasonable person in the same position would use in the same circumstances. A breach of the duty of care is negligence
fiduciary duty
Trustee must invest the funds in the trust, what to sell/hold on to, decide how much of the assets will get distributed out to heirs; Duty of loyalty/duty of care;
springing power of attorney
When a health-related issue happens to principal; Power of attorney that occurs for someone of incapacity; Type of durable power; Only springs to life upon incapacity
irrevocable trust
after you write trust and invest funds, cannot revoke; typically created for reasons such as estate depletion, special needs child, drug/alcohol addiction - move money away from yourself so it is hard for them to get, in high income/high risk career and can get used; give to artificial person; usually done for tax purposes
income
all income that is generated by the trust in a given tax year
step up in cost basis
every asset was bought at some point in time for a certain amount (ie, painting, real estate, most of the time talking about a stock); if a stock was bought a long time ago, chances are price went up and split a lot; when a stock was last actually bought a long time ago, cost basis is likely to be very low; stocks gifted to prof from gma still taxed at cost basis
stock buyback by corporations
redeemable preferred stock permits a corporation to redeem (buy back) the preferred stock at some future date; The terms of the redemption are established when the shares are issued; Corporations usually redeem the shares when the current interest rate falls below the dividend rate of the preferred shares
principal
the property and assets held in a trust; amount originally received minus expenses; all property available to produce ordinary income